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Has Treasury Wine Estates Limited (ASX:TWE) Got Enough Cash?

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Treasury Wine Estates Limited (ASX:TWE), with a market capitalization of AU$12.1b, rarely draw their attention from the investing community. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at TWE’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TWE here.

View our latest analysis for Treasury Wine Estates

Does TWE produce enough cash relative to debt?

TWE’s debt levels surged from AU$596m to AU$875m over the last 12 months – this includes both the current and long-term debt. With this increase in debt, TWE currently has AU$89m remaining in cash and short-term investments for investing into the business. Additionally, TWE has generated cash from operations of AU$295m in the last twelve months, leading to an operating cash to total debt ratio of 34%, indicating that TWE’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TWE’s case, it is able to generate 0.34x cash from its debt capital.

Can TWE meet its short-term obligations with the cash in hand?

At the current liabilities level of AU$809m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.15x. Generally, for Beverage companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

ASX:TWE Historical Debt October 19th 18

Is TWE’s debt level acceptable?

TWE’s level of debt is appropriate relative to its total equity, at 25%. This range is considered safe as TWE is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether TWE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TWE’s, case, the ratio of 15.65x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TWE ample headroom to grow its debt facilities.

Next Steps:

TWE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for TWE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Treasury Wine Estates to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TWE’s future growth? Take a look at our free research report of analyst consensus for TWE’s outlook.
  2. Valuation: What is TWE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TWE is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.